5 Dividend Darlings for the Year Ahead

01/16/2013 10:30 am EST


John Heinzl

Reporter and Columnist, GlobeInvestor.com

This Canadian perspective provided by John Heinzl of Globe Investor uncovers solid income picks on both sides of the 49th parallel.

My New Year's resolution: Collect more dividends than I did in 2012.

That shouldn't be so hard. After all, most of the stocks I own raise their dividends at least once a year. And many of these companies are so predictable that I know, often to the date, when the next dividend hike is coming.

With that in mind, here are five companies that are expected to increase their dividends in the next two months. Nobody knows what their share prices will do in the short term, but barring a nasty surprise, all five companies should have growing revenues, profits, and dividends for many years to come.

Consider this list as the starting point for further research. A useful strategy is to identify well-managed, growing companies and then choose a price target at which to buy them. If the market sells off or the company is hit by a temporary setback, it's often an opportune time to pull the trigger-assuming nothing has changed fundamentally in the long-term outlook.

Canadian Utilities (Toronto: CU)
Price: $71.90
Yield: 2.5%
Five-year annualized dividend growth: 7.2%

Canadian Utilities has jumped about 9% since I wrote a positive column about it on November 28, so investors might want to wait for a better entry point. That said, it's also possible the stock won't look back given that the company is in the midst of a $6 billion capital spending program-focused on its regulated electricity operations in Alberta-that will drive earnings higher over the next several years.

One thing looks fairly certain: CU will raise its dividend in mid-January, by an estimated 9%, according to Bloomberg.

Coca-Cola (KO)
Price: $37.04
Yield: 2.8%
Five-year annualized dividend growth: 8.5%

Shares of the world's biggest soft drink company have lost their fizz, but that's good thing if you're looking to establish a position. With a price-to-earnings multiple of 17 based on 2013 estimates, the stock isn't exactly cheap. But the forward P/E is below its ten-year average of about 19, so it's not outrageously expensive, either, given Coke's solid growth prospects in markets such as India, China, and Russia.

Last year, Coke announced its 50th consecutive annual dividend increase, and in mid-February it will boost its payout once again, by about 10%. Given the shares' recent weakness, I would consider adding to my position at current levels.

TransCanada (TRP)
Price: $47.25
Yield: 3.7%
Five-year annualized dividend growth: 5.3%

With so much attention focused on TransCanada's controversial Keystone XL pipeline, which would ship crude from Alberta's oil sands to the US Gulf Coast, it's easy to lose sight of all the other pipeline and power projects the company has on the go.

There are about $20 billion worth of projects secured and another $10-billion possible over the next 12 months, CEO Russ Girling told the Globe and Mail's Nathan VanderKlippe. Such investments will support solid dividend growth, including an expected hike of about 5% in mid-February. Given the stock's recent run-up, waiting for a pullback might be a prudent strategy.

Tim Hortons (THI)
Price: $48.30
Yield: 1.7%
Five-year annualized dividend growth: 24.6%

Tim's yield of 1.7% won't make you rich, but the coffee chain has been boosting its dividend at an impressive clip. In February, it's expected to raise its dividend by about 19%, according to Bloomberg.

The stock is down sharply from its peak of nearly $58 but the forward P/E is still a bit high at 16, so I would wait for the price to drop another 5% to 10% before adding to my position. Slowing same-store sales growth is a concern, but the chain still has at least four or five years of expansion left in Canada, and the US operations are slowly gaining traction.

Shoppers Drug Mart (Toronto: SC)
Price: $42.45
Yield: 2.5%
Five-year annualized dividend growth: 10.6%

Shoppers has been hurt by generic drug pricing reforms, but the company has battled back with strong sales of cosmetics, over-the-counter drugs, food, and private-label offerings. Longer term, the demographics of an aging population will provide a steady tailwind to pharmacies, which makes Shoppers an interesting buy-and-hold pick.

Shoppers is expected to boost its dividend by about 7.5% in February, but with many analysts considering the shares fully valued at current levels, I would start to get interested if the stock fell to about $40.

The writer owns shares of Canadian Utilities, Coca-Cola, TransCanada, and Tim Hortons. Read more from Globe Investor here...

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